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The profit-structure relationship, efficiency and mergers in the European banking industry: an empirical assessment

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  • L.W. Punt
  • M.C.J. van Rooij

Abstract

An empirical investigation of the relationship between market share or concentration and return on equity or assets provides evidence for the existence of a profit-structure relationship in the European banking sector. Testing several market-power and efficient-structure theories reveals that X-efficiency is the crucial factor explaining the profit-structure relationship because it stimulates both profitability and market share. Bank mergers in recent years have been successful because, on average, X-efficiency and profitability have improved after the consolidation. Moreover, there are no indications of unfavourable price setting behaviour as a result of increased market power.

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File URL: http://www.dnb.nl/binaries/wo0604_tcm46-145922.pdf
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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 604.

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Date of creation: Dec 1999
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Handle: RePEc:dnb:wormem:604

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Keywords: Profit-structure relationship; bank efficiency; bank mergers;

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References

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  1. Jalal D. Akhavein & Allen N. Berger & David B. Humphrey, 1997. "The effects of megamergers on efficiency and prices: evidence from a bank profit function," Finance and Economics Discussion Series 1997-9, Board of Governors of the Federal Reserve System (U.S.).
  2. Allen N. Berger & David B. Humphrey, 1997. "Efficiency of Financial Institutions: International Survey and Directions for Future Research," Center for Financial Institutions Working Papers 97-05, Wharton School Center for Financial Institutions, University of Pennsylvania.
  3. Allen Berger & Timothy Hannan, 1994. "The Efficiency Cost of Market Power in the Banking Industry: A Test of the 'Quiet Life' and Related Hypotheses," Center for Financial Institutions Working Papers 94-29, Wharton School Center for Financial Institutions, University of Pennsylvania.
  4. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
  5. Allen N. Berger & Loretta J. Mester, 1997. "Inside the black box: what explains differences in the efficiencies of financial institutions?," Working Papers 97-1, Federal Reserve Bank of Philadelphia.
  6. J.A. Bikker, 1999. "Efficiency in the European banking industry: an exploratory analysis to rank countries," Research Series Supervision (discontinued) 18, Netherlands Central Bank, Directorate Supervision.
  7. Francisco Pérez García & Javier Quesada Ibañez & José Manuel Pastor Monsálvez, 1995. "Efficiency Analysis In Banking Firms: An International Comparison," Working Papers. Serie EC 1995-18, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  8. Allen N. Berger & Timothy H. Hannan, 1993. "Using efficiency measures to distinguish among alternative explanations of the structure-performance relationship in banking," Finance and Economics Discussion Series 93-18, Board of Governors of the Federal Reserve System (U.S.).
  9. Goldberg, Lawrence G. & Rai, Anoop, 1996. "The structure-performance relationship for European banking," Journal of Banking & Finance, Elsevier, vol. 20(4), pages 745-771, May.
  10. Molyneux, Philip & Thornton, John, 1992. "Determinants of European bank profitability: A note," Journal of Banking & Finance, Elsevier, vol. 16(6), pages 1173-1178, December.
  11. Allen, Linda & Rai, Anoop, 1996. "Operational efficiency in banking: An international comparison," Journal of Banking & Finance, Elsevier, vol. 20(4), pages 655-672, May.
  12. Berger, Allen N. & Hancock, Diana & Humphrey, David B., 1993. "Bank efficiency derived from the profit function," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 317-347, April.
  13. Stevenson, Rodney E., 1980. "Likelihood functions for generalized stochastic frontier estimation," Journal of Econometrics, Elsevier, vol. 13(1), pages 57-66, May.
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Cited by:
  1. Marcel Canoy & S. Onderstal, 2003. "Tight oligopolies: in search of proportionate remedies," CPB Document 29, CPB Netherlands Bureau for Economic Policy Analysis.
  2. Carol Ann Northcott, 2004. "Competition in Banking: A Review of the Literature," Working Papers 04-24, Bank of Canada.
  3. Leo de Haan & Elmer Sterken, 2006. "Price Leadership in the Dutch Mortgage Market," DNB Working Papers 102, Netherlands Central Bank, Research Department.

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